Ternium S.A. First Quarter 2008 Results Summary
Business Context and Reporting Period
This Form 6-K filing, dated May 5, 2008, reports Ternium S.A.'s consolidated financial results for the first quarter ended March 31, 2008. Ternium is a leading steel producer in the Americas with primary operations in Mexico, Venezuela, and Argentina. The results are presented in U.S. dollars in accordance with International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric | 1Q 2008 | 1Q 2007 | 4Q 2007 |
|---|---|---|---|
| Net Sales (US$ million) | 2,427.7 | 1,798.3 | 2,267.2 |
| Operating Income (US$ million) | 434.9 | 415.4 | 297.2 |
| EBITDA (US$ million) | 592.5 | 530.7 | 469.0 |
| EBITDA Margin | 24% | 30% | 21% |
| Net Income (US$ million) | 483.6 | 251.6 | 220.6 |
| Net Income to Equity Holders (US$ million) | 422.1 | 222.1 | 165.6 |
| Earnings per ADS (US$) | 2.11 | 1.11 | 0.83 |
| Shipments (million tons) | 2.7 | 2.5 | 2.8 |
| Net Debt (US$ billion) | 2.1 | N/A | 2.9 |
| Free Cash Flow (US$ million) | (36.5) | 427.9 | N/A |
Material Changes vs. Prior Periods
- Revenue Growth: Net sales increased 35% year-over-year (YoY) and 7% sequentially. The YoY increase was driven primarily by the consolidation of Grupo Imsa and higher revenue per ton ($869 vs. $701 in 1Q 2007).
- Profitability: Operating income rose 5% YoY and 46% sequentially. However, operating margin decreased to 18% from 23% in 1Q 2007, impacted by higher raw material costs and the consolidation of Grupo Imsa's cost structure.
- Volume Trends: Total shipments increased 9% YoY but decreased 3% sequentially. The sequential decline was due to work stoppages at Sidor in Venezuela, partially offset by higher volumes in North America.
- Non-Recurring Items: Net income surged 119% sequentially and 92% YoY, significantly boosted by two non-recurring items: a $96.3 million income tax gain related to Hylsa and a $101.4 million after-tax gain from the sale of non-strategic interests to BlueScope Steel.
- Liquidity and Debt: Net debt decreased by $780.7 million to $2.1 billion, driven by a net repayment of borrowings of $816.4 million. Free cash flow turned negative at -$36.5 million due to increased working capital requirements and capital expenditures.
Outlook, Risks, and Contingencies
- Sidor Nationalization: The Venezuelan government announced the nationalization of Sidor, in which Ternium holds approximately 59.7%. A transition committee has been formed, but the date of control transfer and the financial impact on Ternium remain uncertain. Sidor contributed $513.9 million in revenue and $114.2 million in EBITDA in 1Q 2008.
- Market Outlook: Management expects operating margins to improve in 2Q 2008 due to sustained high steel prices, which should partially offset rising raw material costs. Demand in North America is expected to remain at current levels, while South & Central America demand is expected to remain healthy.
- Cost Pressures: Costs for raw materials (iron ore, scrap), freight, and labor increased YoY. The consolidation of Grupo Imsa introduced a higher cost per ton structure.
Investor Verification Checklist
- Verify the final terms and compensation structure regarding the nationalization of Sidor by the Venezuelan government.
- Assess the sustainability of the 24% EBITDA margin given the rising cost of raw materials and the integration of Grupo Imsa.
- Monitor the impact of work stoppages at Sidor on future shipment volumes in the South & Central America region.
- Review the trajectory of free cash flow, which turned negative in 1Q 2008 due to working capital build-up and capital expenditures.
- Confirm the extent to which higher steel prices are being passed through to customers versus absorbed by cost increases.